More than $50 million of crude destined for Chinese teapot refiners rerouted

China is making a push to open its markets to competition and increase its crude oil refining capacity by allowing smaller “teapot” refiners to handle 1.5 MMBOBP of crude oil, about one-fifth of the country’s refining needs. It is hoped that that teapot refiners, called such because of their small size and basic equipment, can help breakup the monopoly of state-run companies like Sinopec (ticker: SNP).

Earlier today, Baota Petrochemcial Group, a Chinese teapot refinery with permission to import 124 MBOPD, was unable to secure letters of credit for two crude cargoes worth more than $50 million from commodity merchants Vitol and Mercuria, reports Reuters.

The oil arrived at China’s east coast but had to be resold or diverted, causing concern about dealing with private entrants under Beijing’s plan to open its refining sector.

When asked about why the company was unable to secure financing, Zheng Yi, a Boata official said: “We made adjustments (to our crude oil purchases) according to changes in the market.”

While reports indicate that the deal was cancelled amiably, news that teapot refiners may divert cargos could be cause for concerns for crude sellers, said Victor Shum, an oil consultant at IHS. “In an oversupplied market, if someone is interested in spot cargoes, sellers would still consider, but with more caution,” he said.

Chinese crude oil imports are also expected to continue growing despite sluggish economic data, albeit at a slower rate. Much of the increased refining capacity required for this is expected to come from the 20 teapot oil refineries approved for imports. With its 124 MBOPD quota, Baota has the third-largest allocation among these refiners.

With a significant portion of the country’s refining expected to come from these small teapot refiners, scaring off crude sellers with cancelled contracts may hurt their ability to help China meet its energy goals.

Zhu Fang, a Chinese official responsible for the technical assessments before the government oil import quotas are given said the cancelled contracts could lead to tighter rules on the teapot refiners in the future.

“This may help us tighten up the supervision in this year’s assessments and further improve the rules to maybe include the credit standings of the applicants,” he said.

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